Operating Activities

Quick Summary of Operating Activities

The principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

The operating activities of a firm are those functions that are directly related to the provision of goods and/or services to the market. These are the company’s primary business activities, such as manufacturing, distribution, marketing, and sales. Operating activities generate the majority of a business’s cash flow and are largely responsible for its profitability. Cash receipts from goods sold, payments to employees, taxes, and payments to suppliers are all examples of common operating activities. These activities are detailed in the financial statements of a business, most notably the income statement and cash flow statement.

• Operating activities are the daily operations of a business that involve producing and selling a product, generating money, as well as general administrative and maintenance functions.
• Manufacturing, sales, promotion, and marketing are all critical operational activities for a business.
• Cash flows from operations are a critical indicator that financial analysts and investors use to evaluate companies.
• Contrast operating activities with investing and financing activities of a business.

Operating activities are distinct from investing or finance activities, which are functions performed by a business that are not directly tied to the provision of goods or services. Rather than that, financing and investing operations assist the business in operating optimally over the long term. This means that a company’s issuing of shares or bonds is not considered an operating activity.

Operating activities are the daily operations of a business that involve producing and selling a product, generating money, as well as general administrative and maintenance functions. Operating income is the profit left over after operational expenses are deducted from operating revenues in a company’s financial statements. Typically, a company’s statement of cash flows includes a section on operating operations that details the cash inflows and outflows associated with the company’s primary operating activities.

In the event of doubt, operating activities can be easily identified by financial statement classification. Numerous businesses present operating income, or income from operations, as a distinct line on their income statement. Operating income is computed by deducting cost of goods sold (COGS), research and development (R&D) costs, selling and marketing expenses, general and administrative costs, and depreciation and amortisation costs.

Operating income is pre-tax and does not include interest income or expenses. For instance, the operating activities of a clothes store may comprise the following:

• Purchasing supplies from vendors and paying labour costs in order to manufacture garments
• Paying for materials to be sent to the plant and clothing to be transported from factories to warehouses
• Organizing transportation between warehouses and retail locations and mail-order customers
• Providing compensation to employees who work in warehouses and retail stores
• Reimbursing managers for their oversight of operations
• Taxation
• Renting warehouse and retail space

Other less frequent operational activities include lawsuit penalties or financial settlements, refunds, and money received from insurance claims.

Operating Revenues

The primary operating activities of a business that generate money are the manufacturing and selling of its products or services. Sales activities may involve the sale of products created in-house or products supplied by other businesses, as in the case of retailers. Businesses that are primarily engaged in the sale of services may or may not also engage in the sale of items.

For instance, a spa firm may seek additional revenue through the sale of health and beauty items in addition to providing services such as massages.

While interest and dividend income contribute to overall operational cash flow, they are not considered critical operating activities because they are not associated with a company’s main activity.

Operating Expenses

Manufacturing costs, as well as advertising and marketing charges for the company’s products or services, are examples of important operating expenses. Manufacturing costs encompass all direct manufacturing costs that are not included in the cost of goods sold (COGS).

Advertising and marketing operating costs comprise the costs of advertising the company and its products or services through various media venues, whether traditional or online. Furthermore, marketing expenses include things like attending trade exhibits and engaging in public events like charity fundraisers.

Operating Activities and the Cash Flow Statement

Cash flows from operating activities are one of the most important elements of the cash flow statement. It is distinct from the sections on investing and financing. Investing operations are earnings or expenditures on long-term assets like equipment and facilities, whereas financing activities are cash flows between a corporation and its owners and creditors from activities like issuing bonds, retiring bonds, selling stock, or buying back shares.

Accountants add depreciation charges, losses, declines in current assets, and rises in current liabilities to net income, then deduct gains, decreases in current assets, and decreases in current liabilities to provide an accurate picture of a company’s cash flow from operating operations. Investors look at a company’s cash flow from operating operations separately from the other two components of cash flow to see where the money is coming from.

Investors want to see positive cash flow because of ongoing income from operating activities, not because the company is liquidating all of its assets, which results in one-time gains. The balance sheet and income statement of the company help to round out the image of its financial health.

Example of Cash Flow from Operating Activities

Let’s have a look at the cash flow figures of Apple Inc., the world’s premier technological business (AAPL). For the fiscal year ended September 2017, the iPhone maker reported the following:

$48.35 billion in net income
$10.16 billion in depreciation, depletion, and amortisation
$5.97 billion in deferred taxes and investment tax credits
$4.67 billion in other funds

Using the first formula, the aggregate of these values equals $69.15 billion in funds from operations. For the same time period, the net change in working capital was (-5.55 billion). When combined with money from operations, Apple’s cash flow from operational activities is ($69.15 – $5.55) = $63.6 billion.

Synonyms For Operating Activities

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